Rogoff Thinks Chinese Buyers Will Kill the Market

Kenneth Rogoff has written a muddled essay on Chinese capital flight and the art market.

The problem with the essay isn’t its lack of facts or reliance on vague press reports despite solid evidence undermining those reports. The problem with the essay isn’t even Rogoff’s moralistic bias against the art market (“I tend to agree with the philosopher Peter Singer that the obscene sums being spent on premier pieces of modern art are disquieting.”) The problem with the essay isn’t even the easily researched facts that Rogoff gets wrong like naming the buyer of the $300m Gauguin as a Swiss when the seller was from that art-filled state and the buyer was from the Gulf.

Rogoff’s mistake here seems to be his confusion about the art trade and capital flight:

But doesn’t China have a regime of strict capital controls that limits citizens from taking more than $50,000 per year out of the country? Yes, but there are many ways of moving money in and out of China, including the time-honored method of “under and over invoicing.”

For example, to get money out of China, a Chinese seller might report a dollar value far below what she was actually paid by a cooperating Western importer, with the difference being deposited into an overseas bank account. It is extremely difficult to estimate capital flight, both because the data are insufficient and because it is tough to distinguish capital flight from normal diversification.

Alice Rossiter has actually done some very interesting work on this issue. But that’s not how the Chinese who buy multi-million dollar paintings by Western artists are getting their money out of China. And even if it were, its irrelevant to the central question of whether Chinese, or anyone else, is going to keep spending money on art.

There’s no clear evidence that Chinese buyers are the “swing buyers” in the market right now determining high prices. But even if Chinese are buying trophy art as a form of reserve currency and storing the works offshore, Rogoff still has to show us why that buying is suddenly going to dry up. He doesn’t.

What we do know about the most prominent buyers of Western art in China is that they have been eager to get credit for their purchases. Not exactly the behavior of money-launderers.

And several of the buyers have made conspicuous purchases since Xi Jiping’s anti-corruption campaign to emphasize their own status as rich and beyond reproach.